A Brief Review of US Foreign Tax Credit Conditions

 

Expatriates from the United States have a few constraints when it comes to claiming foreign tax credits. These limitations include:

·       Mandatory Tax Imposition: You will not be eligible for the FTC if you do not pay taxes in your resident country. In other words, if you're in Canada and have automatic deductions for Canadian income taxes taken out of your paycheck, it's considered a tax on your earnings, hence eligibility.

 

·       Only Legal and Genuine Foreign Tax Liabilities Qualify: It's quite obvious what this means. When paying taxes to a foreign country, make sure that the tax is lawful and that you are required to pay it before you may claim a foreign tax credit.

·       The Foreign Tax Has To Be Paid Or Incurred By You: In order to qualify, you must have paid the tax, accrued it, or be liable for paying it.

·       It Has To Be an Income Tax: One must have paid income taxes to a foreign jurisdiction in order to be eligible for the FTC. According to the IRS, certain foreign tax categories are ineligible for the FTC, including

a)  Income that has been exempted from taxes, for instance, if you have already taken advantage of the Foreign Earned Income Exclusion.

b) Taxes accrued to a foreign government that has a social security pact with the United States.

You may be eligible for the credit if you file a non-resident tax return and pay or accumulate tax to a foreign nation or U.S. possession on income from overseas sources that is inextricably linked to a trade in the United States.